Sunday, 3 March 2013

Securing Energy Supply (2): Politically-Driven Disruptions

In the first part of this series we noted that the provision of oil, gas and particularly electricity, reliably and continuously on demand, is a considerable, if overlooked practical achievement. We further remarked that the days when this can be taken for granted as regards electricity may be numbered in markets where significant amounts of wind-generated capacity are to be accommodated - and that if anyone doubts this, they are invited to follow developments in Germany as it struggles to maintain feasibility.

However, physical reliability is in the gift of the engineers, market-designers and policy-makers: if the populace wants it (and they really, really do), they can vote for it, pay for it, and it will be delivered. We know what it takes and it is in our own hands.

What is not within our collective control is the political will of some to see our supply disrupted: and it is to security of supply against political contingencies that we now turn.

This lot like coal

Internal threats to energy security are not necessarily the main focus of macro energy policy, but anyone who lived through the UK miners' strikes of 1972, 1974 and 1984-5 will recall how disruptive they can be. On this blog, Sackerson has drawn attention to concerns being raised in this connection arising from the Government's planned sale into commercial ownership of its Pipeline and Storage System, which delivers a significant proportion of the UK's aviation fuel direct to airports and military airfields, as well as much gasoline and diesel to various depots. The GPSS is fairly invulnerable to the periodic tanker-driver strikes that have bedevilled the UK - but how secure will it be in private-sector hands?

Nor are labour disputes the end of the matter. In the period 2008-2010, 'green' protesters laid siege to a power plant site at Kingsnorth in Kent, with the aim of stopping the development of a new high-tech coal-fired power plant, and they can fairly claim to have been a major factor, if not the only one, in the cancellation of that project. Hostilities resumed again last year, with the week-long occupation of a site in Nottinghamshire, to the end of preventing the commissioning of another new power station - this time a nearly-completed gas-fired plant. These UK manifestations are nothing compared to the actions of German eco-warriors who regularly wreak havoc on all manner of electricity sector operations.

This lot don't

With an eye on the future, many commentators see great potential vulnerability in the 'smart grid' and 'smart metering' systems that are being planned in the power sectors of most advanced economies. Designed to facilitate real-time information-flow and control across entire grids down to the level of individual meters, these systems are believed to be inherently vulnerable to malicious hacking for criminal or political purposes.

The kind of political purposes envisioned are generally held to be cyber-warfare waged by hostile nations; and in the same context, countries such as the USA prevent Chinese investors from taking stakes in energy infrastructure (and other deemed 'strategic' facilities). The UK has a long history of being open to foreign investments in its energy sector: the greater part of UK gas and power supply is in the hands of German, French and Spanish companies, and Far- and Middle-Eastern investors hold many stakes in the energy industry here. The question of our openness to Chinese and Russian investment is yet to be confronted in a specific case; but given that the government is actively courting Chinese investment (inter alia) in putative new (French-built) nuclear plants in this country, it would seem likely that the answer will be 'welcome'.

We have found ourselves contemplating geo-political concerns under the heading of 'internal threats' to energy supplies, which leads us naturally to external political threats. We will start at the least apocalyptic end of the spectrum and consider political factors that can disrupt the normal flow of cross-border energy trade. The UK is a nation long wedded to free trade, and we often fail to realise how much less enthusiastic about it even our close EU neighbours are.

In particular, when it comes to energy, most other European countries will ban exports at the drop of a hat if they deem their own supplies are 'at risk' which, in the case of France, can mean simply that gas storage facilities are not completely full. Of course, banning exports makes a mockery of economic notions that cross-border interconnections and price-following free trade maximises the efficient allocation of a scarce resource. But other nations just don't believe in that, when push comes to shove. Thus, in winter 2004 when a short cold-weather snap hit and the price of UK spot gas rose to a much higher level than French prices, ordinarily one would have expected increased flows from France to the UK, until either the pipeline capacity was full, or prices equalised. In fact, the French regulator instructed French gas companies to pay whatever price was needed to top up already almost-full French storage. As a consequence, French prices leapfrogged those of the UK and gas was exported from short-of-gas Britain to plentifully-supplied France.

Needless to say, there are two strongly-held sides to the doctrinal argument here, and for now we simply record the issue. France is not the only country that has behaved in this way: for many years Germany has imported almost as much gas from the Netherlands and Norway as from Russia. Traditionally, if you were to ask a German gas company which of their main supplier-nations was the least reliable, they would say the Dutch who, when they have production problems, prioritise their local customer-base at the expense of exports. (The Russians, of course, with perennial needs for hard currency, would cheerfully cut off their local customers to maintain exports - at least until the spring of 2012 when Putin was facing an election, and for the first time cut exports to maintain local supplies.)

The politically-based disruptions to energy supplies we have considered here - strikes, green protests, protectionism in times of shortage - can be bad enough. But they are a mere inconvenience as compared to the prospect of large-scale, systematic withholding or blockading of energy deliveries for strategic geopolitical ends. We have seen it before; and we fear it happening again. It is to this we turn next.

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